Micro, small businesses shy away from state-run delayed payment resolution, avail litigation instead

New Delhi: Micro and small enterprises that face delayed payment issues from large businesses are shying away from resolving their disputes at the Micro and Small Enterprises Facilitation Councils (MSEFCs) and approaching courts instead to secure payments.

MSEFCs are state-run councils where micro and small businesses can file complaints against debtors and resolve the issue through arbitration and conciliation. However, with a low success rate, high costs, and long timelines for out-of-court dispute resolution, businesses are turning towards courts, where they can file civil suits to recover their payments.

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These councils were established in 2017 in state capitals and other metropolitan regions under the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006.

State governments must establish MSEFCs under the MSMED Act. As of March 2023, there were 152 MSEFCs in the country.

One issue pushing them towards the courts is the lack of enforcement of MSEFC decisions. “The secret ingredient is fear. If a small business wants to secure delayed payments from the larger businesses it supplied to, litigation is more likely to yield results,” said Prem Khandelwal, chief financial officer, Wit and Chai Group, a Pune-based media consultancy and registered small enterprise.

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Khandelwal clarified that while he was satisfied with how MSEFCs operated, the lack of enforcement was a major concern that pushed his firm to resolve delayed payment issues through the courts.

Data provided by the government’s MSEFC dashboard on the Samadhaan portal showed that of the 233,000 applications filed by micro and small enterprises from 2017 till date, about 27% were rejected by the MSEFC, nearly 25% were yet to be viewed by the MSEFC, and only one in every five such applications was disposed of by the MSEFC—all indicating a capacity crunch.

“There is a dire need to build capacity in Facilitation Councils under the MSMED Act 2006, to reduce challenges to arbitral awards and enable faster dispute resolutions,” said Vinod Kumar, president of the industry association India SME Forum, which has over 98,000 member MSMEs.

He added that besides MSEFCs, the only other option for MSMEs to resolve delayed payment disputes is litigation. “Prolonged civil litigation not only intensifies financial difficulties but also takes a toll on the mind space and productive time of the entrepreneur,” said Kumar.

But there is a catch to this shift in strategy. According to India SME Forum’s Kumar, only a handful of MSMEs can move the courts to secure delayed payments, as most such businesses cannot afford long-drawn litigation due to the high cost of legal services and the massive pendency in Indian courts.

Indian courts are currently battling a massive pendency of over 60 million lawsuits.

Legal practitioners explained that the procedure within an MSEFC involves getting parties together for conciliation first, followed by arbitration if required. While conciliation and arbitration are both out-of-court dispute resolution methods involving a third party, a conciliator facilitates discussion among parties to reach a mutually agreeable solution, which may or may not be legally enforceable. Arbitration involves both parties pleading their arguments to an arbitrator, who provides a legally enforceable award.

The crucial aspect of this process is that even after a party secures a legally enforceable arbitral award, it has to go to court to enforce it. These awards are often challenged, making litigation inescapable. Some MSMEs could, therefore, want to skip MSEFCs and directly move courts instead, said one New Delhi-based legal practitioner specialising in MSME disputes, requesting anonymity.

The shift in strategy by some MSMEs comes when the Union ministry of MSME plans to roll out a new online dispute resolution (ODR) portal for delayed payment disputes. Mint reported on 12 March that the government has started training MSEFC officials to use the ODR portal to expedite the dispute resolution process.

The portal will host MSEFCs, arbitrators, and aggrieved MSMEs and conduct all MSEFC procedures online, allowing more parties to resolve their disputes using arbitration and conciliation faster.

Vinod Kumar of India SME Forum said MSEFCs are the best solution for resolving delayed payment disputes, and introducing ODR would aid the process. “MSEFCs are the best solution for recovering dues for Micro and Small enterprises, and introducing ODR and automation mechanisms will ensure more structured arbitration or conciliation processes. It will also improve the efficiency of MSEFCs and reduce the involvement of civil courts that are already highly burdened,” he said.